The Sharing Economy and Transaction Costs

The economist from Duke University, Michael Munger, talks about the sharing economy and transaction costs, based on his latest book Tomorrow 3.0: Transaction Costs and the Sharing Economy (2018) and also conveys on some ideas he wants to develop in his next book.

He begins explaining the argument he wants to figure into his new book, that is that citizens are quite willing to contribute to provision of “voluntary public goods”, but democracy in his opinion is a cumbersome way to achieve it; however, there are new opportunities like the use of blockchain to reduce the transaction costs. Later describes the concept of polycentricity, proposed by Vincent and Elinor Ostrom’s work on cities and voluntary local solutions.

It is possible to provide local public goods in ways that do not involve coercive action by government, that actually allow people to have agreements.”

Munger then talks about the main hypothesis in his book: many apparently disparate unrelated phenomena can be explained simply by the interaction of two interlocking activities, the middleman economy (sell reductions in transactions costs) and the sharing economy (sell access to excess capacity).

The app called Uber, sells reductions in transactions costs, if I have a car and you need a car, we can arrange a mutually beneficial transaction”.

By reducing transaction costs in things like properties and cars, people could make a lot of money simply by making a better use of stuff we already have, Munger explains. He gives examples on how reducing the steps in transactions would make them more efficient, then defines in three aspects what he means by transaction costs.

Lowering the transaction costs raises the opportunity cost of idle durable goods. But that doesn’t translate into excess capacity until we have a way of selling reductions in transactions costs.”

Finally Michael reflects on why software eats the world, why transaction costs are the answer to everything and why we are all better off if we all provide public goods voluntarily instead of getting them through government.